Desoto Resources Limited v. Encana Corporation.

Between 1974 and 1975, Encana (or its predecessor in title), granted petroleum and natural gas (PNG) leases to Penn West or a predecessor in interest with primary terms of between 3 and 5 years. The leases were originally continued on a unitization but the unit terminated in 1998. In 2003 Desoto (who claimed an interest in the leases in and below the Viking) advised Encana that it intended to drill wells on the leased lands whereupon Encana served a notice of termination on Penn West (who acknowledged same) and served Desoto with notice to take proceedings on its caveat. Desoto claimed that the leases continued because the leases were still capable of production and in the alternative, that Encana was estopped from contending that the leases had terminated on the basis that Encana had acknowledged that the leases were valid in bankruptcy proceedings relating to Desoto’s predecessor Jofco in 1999 and then again in correspondence with the Energy and Utilities Board (EUB) in 2002. After filing its action, Desoto applied (without giving notice to Encana) for a licence and drilled a well, notwithstanding Encana’s application for a review and its own undertaking not to drill pending that review. On its review the EUB concluded that Desoto did not have an interest in the minerals to support its application for a licence under s.16 of the Oil and Gas Conservation Act, R.S.A. 2000, c. O-6. Following the Board’s decision, Encana brought this application for summary judgement. The Judge granted the application. The evidence showed that there had been no production from the lands since 1998 and while there was evidence as to reserves, there was no evidence as to the wells drilled that might be capable of production or as to the costs of production. There was no basis for an estoppel argument since the fact that Encana might have acknowledged lease validity in 1999 or 2002 did not mean that it was estopped now from questioning the continuation of the lease. Furthermore there had been no reliance to detriment by Desoto.